The oxidation of ethane to acetic acid was studied over the title catalyst at temperatures between 500 and 580 K and elevated pressures between 1.3 and 1.6 MPa. Since water is known to favour acetic acid formation water was considered as an important variable. For a comprehensive characterisation of the catalyst SEM/EDX, TEM/EDX, XRD, XPS, TPD, and TAP were applied. The catalytic experiments revealed a change in reaction mechanism with temperature. While a consecutive reaction scheme dominates at low temperatures with ethylene as intermediate leading to acetic acid, ethylene and acetic acid are mainly formed in parallel at high temperatures. The initial step for both pathways is the reaction of ethane with lattice oxygen; vanadium acts as redox centre. The ethylene formed undergoes a consecutive reaction to acetic acid which can be described as a heterogeneous Wacker-like reaction, where highly dispersed Pd(II) acts as a catalytically active centre. The role of water in this step seems to be similar to that in the homogeneous Wacker reaction of ethylene to acetic acid. The high dispersion of palladium in the present catalyst system maintained under reaction conditions results from the incorporation of small amounts of palladium into a Mo5PO14 like phase serving as host structure also for vanadium and niobium.